SUMMARY OF COMMENT LETTERS ON THE PROPOSED …



FASB EXPOSURE draft

Business Combinations and Intangible Assets

Summary of Comment Letters

The following is a summary of the first 175 comment letters received in response to the September 1999 FASB Exposure Draft, Business Combinations and Intangible Assets.[1] The breakdown of those letters by category follows. The number in parentheses represents the subset of letters from associations.

| |Category |Number of letters |

| | |(associations) |

| |Preparers | |

| | General industry |37 (4) |

| | Banking |29 (7) |

| | High-tech |26 (5) |

| | Utilities |8 (1) |

| | Pharmaceutical |7 (1) |

| | Insurance |4 (1) |

| |Attestors | |

| | Big 5 CPA firms |5 |

| | Other CPA firms |12 (9) |

| | Individuals |7 |

| |Investors | |

| | Security firms/ |11 (1) |

| |investment bankers | |

| | Independent analysts |5 (2) |

| |Academic |11 (1) |

| |Regulators |3 |

| |Other |7 |

| | TOTAL |172 (32) |

Thirty-one of those 172 letters (primarily those from respondents in either the high-tech (19) or banking (10) category) did not specifically address the issues raised in the notice for recipients. Instead, most of those respondents commented on the Board’s well-publicized decision to eliminate use of the pooling of interests method (pooling method) of accounting for business combinations. In general, their comments focused on public policy considerations related to the Board’s decision to require all business combinations to be accounted for using the purchase method and the perceived deficiencies of the purchase method. The primary public policy points raised are summarized below.

Eliminating the pooling method would have far-reaching and detrimental effects on the entrepreneurial spirit in the technology community and the technological innovations that have fueled the economy in recent years. The pooling method is essential to the continued success of the venture capital industry and the emerging or high-growth sector.

The banking industry has experienced significant desirable consolidation in recent years and is likely to experience further consolidation following the repeal of the provisions of the Glass-Steagall Act. Because many of those transactions have been accounted for using the pooling method, the level of consolidation may be negatively impacted if that method is eliminated.

The views expressed by those respondents specific to the purchase method are captured in the rest of this summary, which focuses on the remaining 141 comment letters that specifically addressed one or more of the issues raised in the notice for recipients.

Issues of Most Concern to Respondents

The concerns expressed by respondents most often were:

The need to have a method other than the purchase method to account for true mergers of equals

Whether it is appropriate to amortize goodwill and place a maximum on the amortization period

The appropriateness of allocating goodwill to asset groups for purposes of impairment reviews

Whether all intangible assets including goodwill should be accounted for and presented in the financial statements in a similar manner

Which intangible assets can be measured reliably enough to be accounted for separately

Whether the cost of separately recognizing (identifying and measuring) intangible assets exceeds the benefits

The appropriateness of recognizing an extraordinary gain related to an acquisition

Whether the disclosure requirements would provide useful information.

Those more contentious issues, as well as new ideas suggested by respondents, are addressed in more detail in the following sections.

Elimination of the Pooling Method (Issue 3)

The Exposure Draft proposed the elimination of the pooling method based on the Board’s conclusion that all business combinations are acquisitions. Issue 3 in the notice for recipients specifically asked whether respondents agreed with the Board that all business combinations are acquisitions. More than three-quarters of the letters received addressed Issue 3. There was strong disagreement within the high-tech and banking sectors, while respondents in other categories were split. For example, the Financial Executive Institute’s Committee on Corporate Reporting noted in its comment letter (#19A):

CCR’s internal discussions and debates over aspects of business combination accounting and the Exposure Draft of the Proposed Statement have been vigorous. CCR members have mixed views on several fundamental issues. A majority of the Committee believes that the Exposure Draft goes too far in abolishing poolings of interests—a method of accounting that has been accepted for decades and is most reflective of the circumstances of some business combinations. There is, however, a substantial minority that agrees with the Board that the time has come to end pooling.

Respondents that supported the elimination of the pooling method generally stated that although a true merger of equals may exist in theory, in practice it is very rare or nonexistent. In support of a “purchase method only” model, those respondents stated that the use of two methods of accounting for the same transaction has resulted in companies making decisions based on desired accounting treatment rather than sound economic practice and has made it difficult to compare the financial statements and performance of companies using the different methods. Aetna’s response (#140) touched on many of the views raised by those who support using only the purchase method to account for business combinations.

We support the Board's decision to eliminate the pooling-of-interests method of accounting for business combinations. We believe the economics of a business combination are more appropriately reflected by the purchase method, which accounts for the business combination at fair value, rather than the pooling-of-interests, which accounts for the business combination at historical cost. We believe that the pooling-of-interests method distorts the fair value exchanged in a business combination and does not allow investors to readily compare investment returns associated with similar transactions that in substance are not economically different.

Further, we believe that history has shown that the existence of two vastly different accounting models (e.g., purchase or pooling-of-interests) has resulted in numerous accounting interpretations and diversity in practice. . . .

We recognize that there are certain limited circumstances in which a true "merger of equals" exists. However, we believe that the benefits derived from applying the purchase method as the single method of accounting for business combinations significantly outweigh any economic issues that might arise from the very limited circumstances that might occur in a true "merger of equals." Therefore, we do not believe that modifying or narrowly applying the pooling criteria as a means to allow the pooling-of-interests method to be retained is an appropriate alternative to using the purchase method as the single method of accounting for business combinations.

As with the responses to the FASB Invitation to Comment, Methods of Accounting of Business Combinations: Recommendations of the G4+1 for Achieving Convergence, many respondents stated that they believe mergers of equals do occur and the purchase method is not an appropriate way to account for those transactions. A true merger of equals was described by the California Society of CPAs (#156) and KeyCorp (#160) in terms of the relative size of the combining entities. Those respondents both suggested that neither entity involved in a true merger of equals should have less than 45 percent or more than 55 percent of the postmerger combined market capitalization or relative voting power. Those respondents, among others, stated that even if a true merger of equals is rare, it should not be ignored.

Some of those who disagreed with the Board’s position stated that mergers are fundamentally different from acquisitions and that eliminating the pooling method for those transactions is not conceptually correct. They argued that both the pooling method and the purchase method should be preserved because each method produces accounting results that appropriately reflect key differences in the ownership, structure, and strategic intent of the combined entity.

Other respondents noted that a combination of more than two entities that does not result in any one of the combining entities obtaining control of the combined entity is not an acquisition. Those respondents stated that the purchase method is not the appropriate method to use to account for that type of transaction.

Respondents suggested that, rather than eliminate the pooling method altogether, the Board should modify the pooling criteria. Those respondents suggested either much stricter criteria to reduce abuses or simplified criteria to make it easier to determine whether a specific combination qualifies for the pooling method. For example, some respondents suggested that the only criterion for using the pooling method would be when the consideration is stock. General Electric (# 15A) shared this view:

In this light, it is apparent that the optimal amount of information utility arises from retaining the previous bases for both sides in all equity exchanges. We therefore believe that carryforward basis should be applied to all business combinations involving an exchange of equity for equity. This is materially simpler than APB No. 16; the actual exchange of equity interests is the sole criterion for continuity accounting, and that criterion cannot be contaminated by other transactions by either party or by the combined enterprise.

Aside from the logic and approachability of this approach, it has the material advantage of extreme simplicity. . . . Relative size is irrelevant. The fact that some share holdings have recently turned over because of market trading is irrelevant. Subsequent dispositions of a portion of the enterprise are irrelevant. And reduction of the share owner base by means of cash repurchases is irrelevant to the remaining share owners—the population about which we ought to care.

Carryover basis accounting for equity exchanges achieves these important objectives, and we endorse it.

Many respondents did not specifically answer the question of whether all business combinations are acquisitions but instead put forth public policy arguments for retaining the use of the pooling method for business combinations—namely, that the availability of the pooling method is critical to the continuation of the merger and acquisition activity in the United States. However, those in favor of eliminating the pooling method countered those arguments with the argument that economically sound transactions will be conducted no matter what form of accounting is used.

In addition, many respondents from the high-tech sector cited the perceived deficiencies in the purchase method—primarily related to the accounting for intangible assets—as arguments against the elimination of the pooling method. Those respondents made the following arguments:

The purchase method makes it difficult to compare those firms that have developed through business combinations with firms that have developed through internal growth—that comparability issue is not present when the pooling method is used because intangible assets are not recognized on the balance sheet; hence, there is no amortization expense on the income statement.

Many intangible assets acquired in business combinations are not easily measured and their values may change quickly and in an arbitrary fashion. Thus, recognizing those assets on the balance sheet may lead to inaccurate reporting and unnecessary charges to the income statement.

Eliminating the pooling method does nothing to solve the fundamental weakness of the treatment of knowledge assets and their value in a transaction. The FASB should study further how to appropriately account for intangible assets, whether purchased or internally generated, in the new economy.

Accounting for Goodwill

Is Goodwill an Asset? (Issue 6(a))

About three-quarters of those who responded to Issue 6(a) in the notice to recipients agreed that goodwill meets the assets definition and recognition criteria of Concept Statements No. 6, Elements of Financial Statements, and No. 5, Recognition and Measurement in Financial Statements of Business Enterprises. Generally, those in agreement said that goodwill is an asset because consideration is paid for it and future benefits are expected. Many of those respondents referred to goodwill as a special type of asset—one that cannot be separated from the company. Those who disagreed that goodwill meets the asset recognition criteria (primarily from the high-tech sector) put forth the following arguments:

Goodwill cannot be used to settle liabilities.

There is no observable market for goodwill.

Goodwill cannot be transferred separately from the entity.

Goodwill has no definite life.

Goodwill is a residual.

Should Goodwill Be Amortized Like Other Assets? (Issue 6(b))

Three-quarters of all comment letters responded to Issue 6(b)—should goodwill be amortized like other assets? Slightly more than half of those who responded to that issue explicitly agreed that goodwill should be amortized like other assets, noting one of two reasons. Some said that goodwill has a finite life or diminishes in value as time goes on. Therefore, they argued, any increase in goodwill results from subsequent outlays, and without those outlays goodwill would diminish in value. Others said that the proposed amortization method is a workable compromise for a unique asset for which accountants have been unable to develop a better accounting treatment.

Respondents that disagreed with amortizing goodwill expressed two differing views of goodwill. Some said that goodwill is not an asset and, therefore, should not be amortized. Others agreed that goodwill is an asset, but stated that amortization is not appropriate because it is not a wasting asset. Those respondents noted that requiring goodwill to be amortized is contrary to the going-concern notion and the intent of business combinations—to increase the overall value of the combining entities.

There was no consensus as to how goodwill should be accounted for among the respondents who did not support the amortization proposal in the Exposure Draft. In fact, the responses to Issue 6(b) were difficult to summarize because a hierarchy of preferred answers were offered by a number of respondents. Those responses often contained numerous “if-then” statements as to preferences for goodwill accounting. For example, SoFTEC (#40A) stated:

We believe the premium paid over the fair value of the tangible assets should be charged directly to comprehensive income. . . .

A less favorable proposal would avoid income statement recognition of the amortization by requiring a periodic charge to flow through comprehensive income. . . .

If the FASB does not agree to reflect the charge through comprehensive income, it should consider a one-time charge through the income statement in the period of the acquisition.

Many respondents (including many from the banking sector) suggested that goodwill be written off immediately to the income statement, other comprehensive income, retained earnings, or equity, with other comprehensive income being mentioned most often. The banking sector may have responded as it did because, for regulatory capital purposes, the entire amount of goodwill is deducted in determining Tier 1 capital.

The respondents who stated that goodwill should not be amortized because it is not a wasting asset suggested capitalizing goodwill and performing periodic impairment tests. However, less than half of the respondents supporting non-amortization of goodwill with periodic impairment tests responded to Issue 7(b), which asked whether a robust and operational impairment test exists for goodwill. One-third of those that did address that issue stated that no such test exists.

Is the 20-Year Maximum Amortization Period Appropriate? (Issue 6(c))

Like the prior two goodwill issues, this issue received a relatively high number of responses. There was limited support for a 20-year maximum amortization period for goodwill, with only about one third of respondents explicitly agreeing with the Exposure Draft. Those respondents generally stated that one arbitrary number is as good as another is and that 20 years is acceptable because it conforms to international standards.

The respondents that explicitly disagreed with the 20-year amortization period were at both ends of the spectrum. Generally, those in the high-tech sector stated that the amortization period should be much shorter, between 1 and 5 years, while those in other industries (such as manufacturing) said that the 40-year maximum should be retained. Those in support of 40 years stated that goodwill provides benefits for more than 20 years and shortening the amortization period would distort reported earnings.

A number of respondents supported a uniform period over which to write off goodwill, with most suggesting a very short period, such as a period not more than five years. Reasons provided for having the same period for all entities included:

Ascertaining the lifespan of goodwill is a subjective process.

Expected cost savings and synergies often do not develop.

Testing goodwill for impairment is difficult.

Goodwill charges constitute a “drag” on earnings for many years.

Some respondents who agreed that goodwill should be amortized over its useful economic life disagreed with placing a limit on the amortization period on the basis that such a limit is inherently arbitrary and inconsistent with accounting theory. Those respondents generally suggested that goodwill should have the same accounting treatment as intangible assets—that is, 20 years should be a presumed maximum, not an absolute.

Can Goodwill Be Tested for Impairment Reliably Enough to Allow Nonamortization? (Issue 7(b))

Half of the respondents that addressed the issue of goodwill impairment reviews stated their belief that a robust and operational method to test goodwill for impairment does exist. The methods suggested most often were:

A test based on a comparison of projections and actual performance

A test based on market capitalization

A test based on a comparison of earnings and the cost of invested capital

A test based on discounted cash flows

A range of methods as permitted by APB Opinion No. 17, Intangible Assets.

A test based on comparisons of the projected results of the business combination and the actual results was suggested most often. Those respondents stated that the acquirer in a business combination determines the price it is willing to pay by making projections of expected synergies and cost savings. Those projections therefore should be documented at the time of the acquisition and goodwill should be reviewed for impairment by comparing those expectations with the actual results. The Chase Manhattan Corp. (#175) suggested such an approach:

Goodwill may be reviewed for impairment by comparing the current stream of cash flows that the acquirer identified and documented (in its valuation) at acquisition to the acquirer’s recorded amount of goodwill. Any shortfall in anticipated cash flows should reduce goodwill and should be charged to income.

There was some support for an impairment review based on a comparison of market capitalization and the carrying amount of goodwill. Those who suggested that approach stated that the market value of the entity’s shares is the true test of the worth of a business. CMS Energy Corporation (#169) suggested the following approach:

When the combined entities have higher than typical earnings within the industry and/or the carrying value of the net assets of the reporting entity is significantly less than its market capitalization, we believe that there is no impairment to the established goodwill. If such an analysis suggests that goodwill might be overstated, the full testing of goodwill would be required. The testing would involve a reassessment of the enterprises expected earnings and market capitalization taking into consideration expected net cash flows and temporary market fluctuations. The Company believes that SFAS No. 121 provides an objective measurement test for the recoverability of goodwill. . . .

Other respondents mentioned that they had considered an impairment approach based on market capitalization but dismissed it as too volatile. They stated that market swings that are unrelated to the specific entity would have an adverse effect on the ability to properly evaluate the fair value of goodwill.

Another impairment approach suggested was a test based on a comparison of the cost of the capital required to purchase the entity and the current period performance. One variation would be to determine the cost of the debt servicing on funds used to purchase the business and compare it to current period cash flows. Another variation would be to compare the cost of capital used to acquire a business to the rate of return on that investment. This approach is described in the letter from Stanley F. Dole, CPA (#143):

Particularly as to goodwill, but also as to property, I would drop cash flow and go to GAAP profit that can be assigned to a business unit, [or a product line] and determine a rate of return on the investment therein. I would relate the rate of return to the cost of capital. To avoid write-downs caused by temporary recession periods, I would do this over a three-year period. If the return were less than the cost of capital, I would require a writedown to bring the investment down to where the return was equal to the cost of capital. The writedown would first apply to goodwill, then other intangibles, and finally, if necessary, to properties.

Many respondents stated that a discounted cash flows test at the enterprise level would be more operational than the undiscounted model in FASB Statement No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of. IMC Global (#119) expressed its preference for a discounted model as follows:

One potential way to review goodwill for impairment is by looking at the future cash flows of the acquired entity on a discounted basis over the remaining useful life of the goodwill. Compare this discounted value to the value of the fixed assets and goodwill balances to determine if an impairment exists. Although this process may be difficult if components of the acquired entity are spread throughout the new entity, this process can provide some insight to the existence of an impairment. However, IMC does not believe that this would lead to situations where a goodwill balance is not amortized over some useful life.

Issues Concerning Ongoing Impairment Testing of Goodwill (Issue 10(d))

The proposed Statement would require goodwill to be reviewed for impairment in accordance with Statement 121. In general, most respondents agreed that a Statement 121 model was appropriate for goodwill. However, about one-third specifically addressed the requirement in paragraphs 22 and 48 to allocate goodwill to individual asset groups and perform the impairment review at that level, stating that in most cases goodwill should not be reviewed for impairment below the enterprise level. They explained that allocating goodwill to individual asset groups would not reflect its true nature because goodwill relates to the entity as a whole.

The reasons respondents provided for why reviewing goodwill for impairment is difficult include:

Long-term projected cash flows are not very reliable.

Subsequent to the business combination, it is not possible to distinguish whether goodwill consists only of acquired goodwill that has been maintained or goodwill that was internally developed subsequent to the combination.

Two-Year Impairment Review (Issue 10(b))

Paragraph 26 of the Exposure Draft requires that goodwill be tested for recoverability in accordance with Statement 121 within two years of the combination date if more than one of the following four factors is present at the time of the business combination:

A significant premium was paid over the market capitalization of the acquired enterprise prior to the start of acquisition discussions.

The acquisition involved a clearly visible auction or bidding process.

The amount of goodwill was significant relative to the cost of the acquired enterprise.

The purchase consideration was primarily in the form of the acquiring enterprise’s shares.

The proposed two-year review received mixed support. Some respondents objected to the two-year time frame on the basis that two years is not long enough for expected synergies and cost savings to develop or for management to review the projections that the transaction was based on. Other respondents argued that impairment testing should be performed within one year or immediately in some cases. Still others did not believe a two-year requirement was necessary, noting that the examples of events and circumstances in both Statement 121 and the Exposure Draft that would require a recoverability test were sufficient to ensure that goodwill impairment reviews would be performed when appropriate.

Income Statement Presentation (Issues 11(a) and 11(b))

The income statement presentation of goodwill charges received more comments than any other issue raised in the notice for recipients. Unqualified support for the proposed presentation of goodwill charges on a net-of-tax basis was limited. Most of the respondents that expressed support stated that similar treatment should be allowed for all acquired intangible assets rather than only for goodwill. The presentation provisions received the most support from the high-tech and banking sectors, although only about half of the respondents in those sectors expressed support.

Regardless of whether they supported the proposed presentation, almost all respondents agreed that the special treatment afforded goodwill charges in the income statement would be a strong disincentive to separately recognizing other intangible assets.

Among those arguing against the proposed income statement presentation, many stated that goodwill amortization is part of the operations of a business and, thus, removing it from operations would distort operating income. Most of those respondents suggested requiring goodwill amortization and its related tax effects to be disclosed in the notes to the financial statements or requiring goodwill amortization to be a separate line item in the operating section of the income statement.

Many respondents also stated that the proposal would lead to income statements that would be unnecessarily confusing. Those respondents observed that the proliferation of different earnings totals and earnings per share figures serves only to complicate the income statement and render it less useful.

Another argument is that it would open the door for a myriad of requests for special income statement treatment of noncash items. In fact, in addition to those respondents who supported “below the line” presentation of amortization for all identifiable intangible assets, some respondents urged the same presentation for the depreciation on the stepped-up portion of all acquired depreciable assets.

Accounting for Negative Goodwill (Issue 5)

There was little support for the proposed treatment of negative goodwill. About one-quarter of those responding to Issue 5(a) stated that the proposed treatment was preferable to the approach in APB Opinion No. 16, Business Combinations. A few stated that they were willing to accept the proposed treatment of negative goodwill as a compromise because it is such a rare occurrence. However, virtually none supported the notion of recording the entire excess as an extraordinary gain as described in Issue 5(b).

Most respondents that addressed Issue 5 generally opposed the idea of recognizing any gain on a purchase because it cannot be justified conceptually. Those respondents preferred recognizing negative goodwill as a deferred credit that would be amortized in a manner similar to positive goodwill, with some noting that both items represent a residual value. However, whether the amount to be amortized was determined before or after the excess was allocated to acquired assets as proposed in the Exposure Draft was not always clear.

A number of respondents also did not agree with the requirement to allocate negative goodwill to acquired assets—especially given the emphasis in the Exposure Draft on recording assets and liabilities at their true fair value. Most of those respondents would record the entire excess as a deferred credit; however, a few respondents suggested that negative goodwill be recorded as a component of equity or as a contingent liability.

Accounting for Intangible Assets

Can Intangible Assets Acquired in a Business Combination Be Measured Separately From Goodwill with a Sufficient Degree of Reliability to Meet Asset Recognition Criteria? (Issue 8)

Most respondents to Issue 8 agreed that many intangible assets acquired in a business combination can be identified separately from goodwill. However, many questioned the ability to value those identifiable intangible assets and urged the Board to clarify the term reliably measurable. Others said valuation of separate intangible assets is possible but doubted that it would be cost effective.

There was a general consensus among respondents that the proposed Statement, as written, would meet the Board’s objective of separately recognizing more intangible assets. However, as noted previously, most respondents agreed that the special display of goodwill charges on the income statement would be a disincentive for separate recognition of other acquired intangible assets.

Some respondents stated that it was not likely that the provisions of the Exposure Draft would increase the recognition of acquired intangible assets, but they had no suggestions on how to achieve that objective. Others questioned the Board’s objective of recognizing more intangible assets given the subjective and arbitrary nature of intangible asset valuations. A number of respondents suggested that many intangible assets, including goodwill, be recognized as a single asset, with only intangible assets that can be sold separately and have distinct cash flows being recognized separately. General Motors Company (#173) described this approach:

. . . we support an approach that aggregates the excess of purchase price over the fair value of the tangible net assets of the acquired business. This excess would be comprised of identifiable intangible assets [as described below], and remaining goodwill. We would not place any artificial and arbitrary time period limits on amortization of intangible value acquired in a business combination, but instead utilize a “burden of proof” approach for identifying the appropriate life and time period for each identifiable intangible. The remaining goodwill would then be amortized over the period used in valuing the business not to exceed [40 years].

We believe this approach is preferable to the Board’s approach in that it further recognizes the uniqueness of each acquisition and recognizes that the future net cash flows from intangible assets cannot be separated from the future net cash flows of the acquired business. For example, working capital, fixed assets and debt of an acquired business can be turned over without significantly affecting the future net cash flow of that business. The patent or brand, however, that limits other’s use to the core product of the acquired business cannot be turned over without significantly affecting that business’ future net cash flow.

. . . we suggest that the Board further refine the criteria for recognition of intangibles in a business combination to include only those intangibles which are traded in a secondary market and those intangibles which would be recognized under other existing accounting standards.

We strongly believe in the paradigm that in a business combination, an enterprise acquires future net cash flows rather than net assets. In that view, it is not possible or relevant to separate the future net cash flow from an in use identifiable intangible asset from the future net cash flow of the acquired business.

Some respondents maintained that distinguishing between identifiable intangible assets and goodwill is meaningful to users.

Most respondents found Appendix A appropriate and useful. Some suggested the list be divided into those intangible assets that could be reliably measured and those that could not (and therefore should be included in goodwill). Several respondents expressed concerns that the list would be viewed as an all-inclusive checklist rather than an identification tool.

Are the Criteria to Overcome the 20-Year Maximum Useful Life Presumption for Intangible Assets Appropriate? (Issue 9)

Most respondents agreed with the criteria in paragraph 37 for overcoming the presumption of a useful life of 20 years or less for intangible assets and the criteria in paragraph 41 for nonamortization. Several requested clarification of the terms clearly identifiable cash flows and observable market and guidance on how to determine when an intangible asset has an indefinite life. However, none suggested additional criteria or modification of the criteria included in the Exposure Draft.

Those who did not support the criteria in paragraphs 37 and 40 stated that, conceptually, acquired intangible assets should be amortized over their useful lives and that an arbitrary 20-year presumptive maximum was not appropriate, nor were the criteria in paragraph 40 necessary for determining the useful life. A few, however, argued for a 20-year maximum amortization period for intangible assets (similar to goodwill) with no provision for a longer amortization period or nonamortization. Several respondents specifically argued that nonamortization of intangible assets is inappropriate because an intangible asset cannot retain its value forever without continued outlays to maintain the asset.

Disclosure Requirements

Will the Proposed Disclosure Requirements Provide Useful Information? (Issue 12)

The proposed disclosure of a condensed balance sheet showing the book value and the market value of the assets and liabilities acquired received mixed support (Issue 12(a)). Those who supported the proposed disclosure stated that it would provide useful information. For example, American Community Bankers (#45A) stated:

The one-time disclosure of the relative book and fair values of the assets and liabilities involved in the acquisition will be more informative and will give the users of the financials a better grasp of the magnitudes involved in the purchase price allocation.

Many respondents stated that pre-acquisition book values are irrelevant after a business combination and that the information may be difficult or impossible to obtain, especially when the acquired company was privately held. Many respondents questioned why the Board would require disclosure of book values in a standard that eliminates use of the pooling method. Some argued that the proposed disclosure was evidence that the pooling method more accurately reflects the nature of a business combination than the purchase method does.

The proposal to eliminate the pro forma disclosures currently required by Opinion 16 received mixed support as well (Issue 12(b)). Some respondents stated that the pro forma disclosures are burdensome and noted that users could obtain the information from SEC filings if they needed it. Others stated that the information in the pro forma disclosures is critical when comparing pre- and post-acquisition performance to assess the combined performance of the entities and that the inability to do so is one of the deficiencies of the purchase method vis-à-vis the pooling method. Many of those respondents stated that the disclosure would not be burdensome because the SEC already requires it.

Although the Board did not ask for comments on the other required disclosures, many respondents stated that the disclosure requirements were excessive. The requirements to disclose information about intangible assets by class and to describe the elements of goodwill were mentioned by many as unnecessary and contributing to disclosure overload.

other issues

Responses received on the remaining issues raised in the notice for recipients are summarized briefly below.

Scope and Definition (Issues 1 and 2)

Most respondents agreed with addressing not-for-profit combinations in a separate project. They generally stated that the strategy and goals of combinations of not-for-profit enterprises differ from those of for-profit enterprises. A few respondents requested that mutual insurance companies and credit unions be excluded from the scope of the proposed Statement and included in the scope of the not-for-profit project. (All of the comments made with respect to Issue 1 will be considered in the Board’s separate not-for-profit combinations project).

While most respondents agreed with the proposed definition of a business combination, some stated that the final Statement should retain the Opinion 16 definition of a business combination, modified only to include the exchange of one business for another. In addition, several respondents urged the Board to define the term business (rather than leaving that to the EITF or the SEC) and clarify what is meant by joint venture arrangements that would be outside the scope of the Statement.

Criteria for Identifying the Acquirer in a Business Combination (Issue 4)

Most respondents agreed that the criteria in paragraphs 15–17 for identifying the acquiring enterprise in a business combination are appropriate. However, many suggested including a hierarchy for determining how to weigh the criteria, with a few specifically requesting that the presumption in Opinion 16 that the acquiring enterprise is the one with the largest share of voting rights be retained.

A few respondents suggested that the Statement incorporate the notion of control from the consolidations project. In addition, several provided specific suggestions for additional criteria for identifying the acquirer to be included in the final Statement, including relative market capitalization and payment of a premium for the shares exchanged.

Effective Date and Transition (Issues 13 and 14)

Most respondents agreed with the proposed transition provisions for Parts I and II of the Exposure Draft. However, some supported retroactive application of the proposed Statement to goodwill and other intangible assets. Some of those respondents wanted the option of reducing the amortization period for previously acquired goodwill to 20 years and ceasing amortization of intangible assets that meet the nonamortization criteria.

A few respondents addressed the proposal that the final Statement be effective upon issuance. Most of those respondents requested that the Board allow some time between issuance of the final Statement and its effective date to accommodate transactions in process. Delays in the effective date of three or six months were the most commonly requested.

Filename: Comment Letter Summary.doc

Date prepared: January 25, 2000

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[1]This summary is actually of 172 of the first 175 letters because 3 letters were requests to speak at the public hearings with no follow-up letter addressing the Exposure Draft. We received 198 comment letters as of January 25, 2000.

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